To become a serious and successful investor, you must first gain financial literacy. Without the right basic knowledge of finance, you can all too easily put your money into poor investments which either fail altogether, resulting in you losing your stake, or that perform very poorly meaning that you have lost money-making opportunities.
The investment marketplace is fraught with danger for the uninitiated. You must know how money works in order to make it work for you, and this is where financial literacy comes into the equation.
What is the difference between saving and investing?
Saving, in its simplest form, is tucking money away into some sort of savings’ vehicle. But, ever since the financial crash of 2007/2008, standard savings accounts have paid very little in terms of interest. The truth of the matter is that if you use this method for saving, you are probably losing money in real terms.
Saving is to be commended
But there are still two good things to consider about using standard savings accounts. First of all, you are saving, and that is to be commended – even though you may be losing out of earning money compared to other options in real terms.
What does the phrase “in real terms” mean? It refers to times when the rate of inflation is higher than the interest you earn on your savings. In essence, it means that your money won’t buy as much when you take it out as it would have when you put it in.
Creating a financial safety net
One of the major plus points to having savings is that it gives you a safety net if something unexpected happens that requires money to sort it out. In an ideal world, drawing on savings allows you to carry on financially without it affecting your standard of living. The trade off when investing your cash is this money becomes ‘locked down’ i.e. it’s not fluidly available for you to draw upon in a moment’s notice should you need it. Depending on your savings account type you may encounter similar conditions where your cash investment into the account is inaccessible for a period of years (generally the longer you ‘lock away’ the cash savings the better interest rate you can get).
Saving with attitude
Investing, on the other hand, is more like saving “with attitude.” It promises you a far better return on the original sum you invest. In other words, it suggests you will get a significantly higher rate of interest. However, you need to take the words “promise” and “suggest” into account. They are not guarantees and this is why you need to do your homework in terms of understanding how money works.
Understanding the risk factor
In the investment world, the greater the risk you take, the higher the interest rate you are promised. However, the riskier the vehicle in which your money is invested, the greater the chance of it failing. Failure can sometimes mean that the actual interest you receive is less than what was promised, and in a worst-case scenario, it may mean you losing your money entirely.
The vehicles that are referred to above include things like stocks and shares, commodities, property and foreign exchange. Each has its risk factor – low, medium or high. But the underlying truth with investing is that you can lose everything, which is why many people who are risk-averse, prefer to save rather than invest.
The importance of financial literacy
If you do wish to invest your money, it is imperative that you find yourself a broker whose judgement you can trust. But before you do decide to go ahead with investing, you must be financially literate. Only then will you be able to weigh up, the benefits, the pitfalls and the potential risk.